ZULFIQAR HASAN 1. 2 Text Book James C. Van Horne, John M. Wachowicz Jr. “Fundamentals of Financial...
-
Upload
octavia-knight -
Category
Documents
-
view
239 -
download
1
Transcript of ZULFIQAR HASAN 1. 2 Text Book James C. Van Horne, John M. Wachowicz Jr. “Fundamentals of Financial...
ZULFIQAR HASAN1
ZULFIQAR HASAN2
Text BookJames C. Van Horne, John M. Wachowicz Jr. “Fundamentals of Financial Management”, Latest Edition
•http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_13/106/27149/6950232.cw/index.html•http://cwx.prenhall.com/bookbind/pubbooks/wachowicz
Book Websites:
Lecture Handout on Webwww.studyandjobs24.com >University Resources >Undergraduate> BBA
ZULFIQAR HASAN3
Course Websites:http://wps.pearsoned.co.uk/ema_uk_he_wachowicz_fundfinman_13/106/27149/6950232.cw/index.html
ZULFIQAR HASAN4
Additional Readings
• Fundamentals of Financial Management By Brigham & Houston; Edition ≥10th
• Principles of Managerial Finance by L J Gitman
• Essentials of Managerial Finance by Besley and Brigham
• Corporate Finance by Ross, Westerfield and Jaffe
• Fundamentals of Corporate Finance by Brealey, Myers and Marcus
ZULFIQAR HASAN5
Course Websites
www.teachmefinance.com www.studyfinance.comwww.investorwords.com www.Islamicfinance.com
Required Instrument
A good Financial Calculator or a Good Scientific Calculator.
Your Calculate must have any of the following keys:
Xy or yx or Λ
ZULFIQAR HASAN6
Evaluation Process
Mid-Term 30
Final Exam 40
Continuous Assessment
Class Test: Closed book/ Open book/Surprised Test/ Take Home exam/viva 20
Assignment /Case Study/Presentation
Class Attendance and Performance 10
Total 100
ZULFIQAR HASAN7
Topic 01 CONTENTS Fundamentals of Financial Management: Definition of Financial Management, Financial management decisions, The balance sheet model of the firm, Pie model of Capital structure, Modern World Perspective: Globalization of Business, Information Technology, and Regulatory Attitude of Management. Importance of Financial Management, Goals of the Corporation: Agency costs and agency problems-the set of contracts perspective, Separation Theorem, Financial Environment: External Environment, Business Ethics, MNCs.
ZULFIQAR HASAN8
Recalling: What is Finance?
They don't know how to invest/utilize this money
They don't know how to collect this money
03
They don't know in where they can invest/utilize this money
They don't know from where they can collect this money
02
They are the individual /organization/government who have excess/surplus of money
They are the individual /organization/govt. who have shortage/deficit of money
01
Surplus SectorDeficit Sector
Finance is the process of transferring fund from surplus economic unit to deficit economic unit.
ZULFIQAR HASAN9
Meanings of Finance1. Finance is the relationship between deficit sector and
surplus sector of the society.
2. The commercial activity of providing funds and capital
3. The branch of economics that studies the management of money and other assets
4. The management of money and credit and banking and investments
5. Finance represents the processes that transfer money among businesses, individuals, and governments
6. Actually “ the art and science of Managing Money” is called Finance.
ZULFIQAR HASAN10
Common Functions of Finance
• Financial Planning• Identification of Sources• Analyzing and Selecting
of Sources • Raising of Funds• Investment of
Funds/Utilization of Fund
• Protection of Funds• Distributions of
Profit/Dividend
Sectors of Finance
1. Financial Markets and Institutions
1. Money and capital markets
2. Investments1. Investment in Existing
Business2. Investment in Expansion
of Existing Business3. Investment in New
Project4. Investment in R&D
3. Financial management
ZULFIQAR HASAN11
Review
01 Finance is the relationship between deficit sector and surplus sector of the society which represents the processes that transfer money among businesses, individuals, and governments. False /True
02 The main objective of Finance is to keep the financial gap between deficit sector and surplus sector of the society. False/True
03 How many major sectors of Finance?
04 What are the sources of Financing?
05 What are the main functions of Finance?
ZULFIQAR HASAN12
Financial management Definition
• Financial management can be defined as the process of acquiring and using funds to accomplish a financial objectives.
• Financial Management concerns the acquisition, financing, and management of assets with some overall goal in mind. (James C Van Horne)
• The another name of Financial Management is Managerial Finance or Business Finance.
ZULFIQAR HASAN13
Questions involved in Financial Management
1. What long-term investments should the firm take on?
2. Where will we get the long-term financing to pay for the investment?
3. How will we manage the everyday financial activities of the firm?
Financial Management Decisions
1.Capital budgeting (Investment)
2.Capital structure (Financing)
3.Working capital management (Short-term Financing)
ZULFIQAR HASAN14
Who is a Financial Manager?
Financial Manger is a person who actively manages the financial affairs of any type of business, whether financial or nonfinancial, private or public, large or small, profit-seeking or not-for profit.
To create value, the financial manager should:
1.Try to make smart investment decisions.
2.Try to make smart financing decisions.
ZULFIQAR HASAN15
Forms of Business Organization
1. Sole proprietorship
2. Partnership
3. Corporation
ZULFIQAR HASAN16
Sole Proprietorship
Definition: A business owned by one person and operated for his or her own profit.
Advantages:1. Business owned by one person.2. Least regulated form of organization.3. Owner keeps all the profits but assumes
unlimited liability for the business’s debts. 4. Life of the business is limited to the owner’s life
span.5. Amount of equity raised is limited to owner’s
personal wealth.
ZULFIQAR HASAN17
Sole Proprietorship: Disadvantages
1. Limited to life of owner and difficult to continue when proprietor dies.
2. Equity capital limited to owner’s personal wealth
3. Owner has Unlimited liability
4. Difficult to sell ownership interest
5. Difficult to give employees long-run career opportunities
ZULFIQAR HASAN18
PartnershipA partnership has roughly the same advantages and disadvantages as a sole proprietorship. Business formed by two or more owners is called Partnership.
• All partners share in profits and losses of the business and have unlimited liability for debts.
• Easy and inexpensive form of organization.• Business ceases if one partner sells out or dies.• Amount of equity raised is limited to the combined
personal wealth of the partners.• Income is taxed as personal income to partners.
ZULFIQAR HASAN19
Corporation: Advantages
1. Limited liability2. Unlimited life3. Separation of ownership and management4. Transfer of ownership is easy5. Easier to raise capital
A business entity that legally functions separate and apart from its owners.A business firm which sells its shares in the financial market or already got the permission to sell its shares is called Corporation.
ZULFIQAR HASAN20
Corporation: Disadvantages1. Subject to greater government regulation
2. More expensive to organize than other business forms
3. Facing Agency problems
4. Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)
5. Lacks secrecy, because stock holders must receive financial reports.
ZULFIQAR HASAN21
Partnership vs. Corporation
EasyUneasyRaising of Fund
LargeMediumCapital Size
LimitedUnlimitedLiability
UnlimitedLimitedLife Duration
SeparateSameOwners and Mangers
DoubleSingleTaxation
EasyDifficultTransferability of ownership
HardEasyStarting
CorporationPartnershipIssues
ZULFIQAR HASAN22
Discuss how separation of ownership and management can be both an advantage and a disadvantage:
• Advantages– You can benefit from ownership in several
different businesses (diversification)– You can take advantage of the expertise of
others (comparative advantage)– Easier to transfer ownership
• Disadvantage– Agency problems if management goals and
owner goals are not aligned
ZULFIQAR HASAN23
Goals of the Firm
1. Survival
2. Avoid financial distress and bankruptcy
3. Beat the competition
4. Maximize sales or market share
5. Minimize costs
6. Maintain steady earnings growth
7. Maximize profits
8. To Maximize the Wealth
ZULFIQAR HASAN24
Objectives of Financial ManagementObjectives of Financial Management may be broadly divided into two
parts such as:1. Profit Maximization: Main aim of any kind of economic activity is
earning profit. A business concern is also functioning mainly for the purpose of earning profit. Profit is the measuring techniques to understand the business efficiency of the concern. Profit maximization is also the traditional and narrow approach, which aims at, maximizes the profit of the concern firm. Profit maximization is also called as earnings per share maximization. It leads to maximize the business operation for profit maximization.
2. Wealth Maximization: Wealth maximization is one of the modern approaches, which involves latest innovations and improvements in the field of the business concern. The term wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern. Wealth maximization is also known as value maximization or net present worth maximization that means maximization of the market price of share.
ZULFIQAR HASAN25
Criticism against Profit Maximization1. It is vague: In this objective, profit is not defined precisely or
correctly. It creates some unnecessary opinion regarding earning habits of the business concern.
2. It ignores the time value of money: Profit maximization does not consider the time value of money or the net present value of the cash inflow. It leads certain differences between the actual cash inflow and net present cash flow during a particular period.
3. It ignores risk: Profit maximization does not consider risk of the business concern. Risks may be internal or external which will affect the overall operation of the business concern.
4. Profit maximization leads to exploiting workers and consumers.5. Profit maximization creates immoral practices such as corrupt
practice, unfair trade practice, etc.6. Profit maximization objectives leads to inequalities among the
sake holders such as customers, suppliers, public shareholders, etc.
ZULFIQAR HASAN26
Favorable Arguments for Wealth Maximization1. The primary financial goal is shareholder wealth
maximization, which translates to Direct benefit to shareholders as stock price increases
2. Societal benefits as businesses compete to create wealth3. Includes effects of all financial decisions4. Wealth maximization is superior to the profit maximization
because the main aim of the business concern under this concept is to improve the value or wealth of the shareholders.
5. Wealth maximization considers the comparison of the value to cost associated with the business concern. Total value detected from the total cost incurred for the business operation. It provides extract value of the business concern.
6. Wealth maximization considers both time and risk of the business concern.
7. Wealth maximization provides efficient allocation of resources.
8. It ensures the economic interest of the society.
ZULFIQAR HASAN27
Is stock price maximization the same as profit maximization?
• No, despite a generally high correlation amongst stock price, EPS, and cash flow.
• Current stock price relies upon current earnings, as well as future earnings and cash flow.
• Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).
ZULFIQAR HASAN28
Agency Problems
• The agency problem suggest a possibility of conflict of interests between these two parties. Agency problem is the likelihood that managers may place personal goals ahead of corporate goals. The agency theory was Developed by Jensen and Meckling, 1976
• The agency relationship is the relationship between shareholders (owners) and management of a firm.
• Agency costs refer to the direct and indirect costs arising from this conflict of interest.
1. Monitoring costs (audit fees, higher employee compensation)2. The cost of Implementing control devices.
ZULFIQAR HASAN29
1. Monitoring of management;2. Managerial compensation plans
a) Incentives plansb) Stock Optionsc) Performance Plansd) Performance Sharese) Cash Bonuses
3. Direct intervention by shareholders4. The threat of firing5. The threat of takeover
Factors/Tools used to Limit the Conflicts
ZULFIQAR HASAN30
• Projected cash flows to shareholders
• Timing of the cash flow stream
• Riskiness of the cash flows
Factors that Affect Stock Price
ZULFIQAR HASAN31
ZULFIQAR HASAN32
What is Financial Market?• A financial market is a market in which financial
assets such as stocks and bonds can be purchased or sold. ( Jeff Madura)
• Financial markets are mechanisms by which borrowers and lenders get together.
• It is a system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers, no matter the location. (Besely & Brigham)
ZULFIQAR HASAN33
What is Financial Market?• It is a forum in which suppliers of funds and
demanders of funds can transact business directly.
• Financial Market is a market where financial goods and services are bought and sold.
• Financial markets are institutions and procedures that facilitate transactions in all types of financial claims—facilitate the transfer of savings from economic units with a surplus to economic units with a deficit.
• Exist to facilitate the efficient flow of savings from the surplus sectors to deficit sectors
ZULFIQAR HASAN34
Why study Financial Markets and Institutions?
1. They are the cornerstones of the overall financial system in which financial managers operate
2. Individuals use both for investing
3. Corporations and governments use both for financing
4. Provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units)
5. Provide payments system
6. Provide means to manage risk
ZULFIQAR HASAN35
1. Money Market2. Capital Markets 3. Primary Market4. Secondary Markets
a) Organized Marketb) Over-the-Counter Market
5. Foreign Exchange Marketa) Spot Marketb) Forward
Broad Classifications of Financial Markets
ZULFIQAR HASAN36
Money Market vs. Capital Markets
Money Market: Markets that trade debt securities with maturities of one year or less.Examples: CD’s, Bangladesh Bank Treasury bills, Commercial Papers, Repurchase agreements etc.
• Short-term, < 1 year• High quality issuers• Debt only• Primary market focus• Liquid market--low
returns
Capital Market: Markets that trade debt and equity instruments with maturities of more than one yearDebt Instruments: Bonds, Mortgages etc.Equity Instruments: Stocks
• Long-term, >1Yr • Range of issuer quality• Debt and equity• Secondary market focus• Financing investment--
higher returns
ZULFIQAR HASAN37
Primary Market vs. Secondary Markets
Primary Market: markets in which users of funds raise funds by issuing financial instruments Users of funds : corporations, governmentsFinancial instruments: stocks and bonds
• New issue of securities• Exchange of funds for
financial claim• Funds for borrower; an
IOU for lender
Secondary Market: markets where financial instruments are traded among investors:Secondary Markets Examples: NYSE, NASDAQ, DSE, CSE)
• Trading previously issued securities
• No new funds for issuer• Provides liquidity for
seller
ZULFIQAR HASAN38
Organized vs. OTC Markets
Organized• Visible marketplace• Members trade• Securities listed
Example: New York Stock Exchange, DSE, CSE.
OTC Market• Wired network of dealers• No central, physical location
Examples: NASDAQ
ZULFIQAR HASAN39
Foreign Exchange MarketsDefinition: Markets deal in trading one currency for another is called “FX” market. (e.g. dollar for yen)
1. Spot Market: The “spot” FX transaction involves the immediate exchange of currencies at the current exchange rate
2. Forward Market: he “forward” FX transaction involves the exchange of currencies at a specified date in the future and at a specified exchange rate
ZULFIQAR HASAN40
1. Money market securities
Money market securities are debt securities that have a maturity of one year or less.
2. Capital market securities
Securities with a maturity of more than one year are called Capital market Securities.
3. Derivative securities
Financial contracts whose value is derived from the values of underlying assets
Securities Traded in Financial Markets
ZULFIQAR HASAN41
Concept Check!: Classify the following financial Transaction as to whether they fit in (a) the money market or the Capital Market, (b) the primary market or the Secondary market and (c) the spot market or the forward/futures market.
a) You visit Eastern Bank Ltd and borrow a three-year loan to purchase a Flat at Dhanmondi Area.
b) You Purchase a 9-month Bangladesh Bank T-Bill at Taka 100,000.
c) Hearing the upward trend of Beximco Pharma’s Share price, you have just purchased 100 shares of this company from Dhaka Stock Exchange.
d) You purchase $1000 from HSBC Bank at 10:00 am today.
e) Concerned about recent trends in the price of $, from Sonali Bank you purchase 1000 Dollars at today’s $/Tk exchange rate for delivery in six months, when you plan to fly United States of America.
ZULFIQAR HASAN42
PreparationThe followings are given as sample questions only!!!!
1. Define Financial management. Discuss the three financial management decision relating them to the Balance Sheet Model.
2. What are the common types of business organizations? Differentiate between a Partnership and a Corporation.
3. Discuss the goals of the a business firm. Why profit maximization should not be the goal of a Corporation?
4. What is agency problem? Discuss the ways to reduce the agency problems in any firm.
5. Define Financial market. Discuss the characteristics of different financial markets in details.